A stock split is a corporate event in which each outstanding share of stock is divided into a larger number of shares of stock, such as 2 shares, 3 shares, or even more. For example, a shareholder who held 10 shares of stock prior to a 2-for-1 split would own 20 shares afterward.
The stock split has no economic effect on the shareholder's holdings, because the value of each share will decline proportionately to the split. So in the example above, if the price of each share was $30 before the split, it will be $15 after the split, so that the shareholder holds the same value in the corporation before and after ($30 times 10 shares = $300 before the split and $15 times 20 = $300 after the split).
One of the uses of a stock split is to keep shares that have appreciated in the past at a manageable price level. The classic example of the results of not splitting a rising stock is Berkshire Hathaway's Class A Common Stock (NYSE: BRK-A), which generally trades at a price over $100,000 per share. Obviously, this makes it difficult for diversified investors to purchase even one share of the stock, which limits the number of holders the stock can have.
The stock split should be distinguished from a stock dividend, even though they have similar (and sometimes identical) results. In a jurisdiction that recognizes par value, the stock dividend results in an increase in the legal capital of the corporation, while a stock split reduces the par value of each share and maintains legal capital at the same level. The MBCA no longer recognizes the concept of par value, and therefore makes no distinction between stock splits and stock dividends. See MBCA Section 6.23 Official Comment.
The stock split should also be distinguished from the reverse stock split, which changes the shares held by shareholders into a smaller number of shares.